SAN FRANCISCO — IRC Section 1031 exchanges have been around since 1921, but up until 1980, you basically had to buy and sell on the same day, which made it a difficult feat to pull off. After 1984, the rules changed: exchangers now had a 45-day period following the close of escrow on a relinquished property to identify a replacement property. While this continues to be the case with 1031 exchanges today, finding the right property within 45 days can be quite challenging, especially with the complexity of today’s market.
One way to address this is with a safe harbor reverse Section 1031 exchange, which is a transaction that’s facilitated via an Exchange Accommodation Titleholder (EAT). First, your Qualified Intermediary will set up an EAT to buy and hold the property you wish to purchase and “park” it for you. You’ll need to identify the Relinquished Property you’re selling with the EAT, and you must complete the sale and purchase of your Replacement Property from the EAT within 180 days following its purchase of the parked property. This gives you more control over the timing of your transaction and eliminates the 45-day period to identify a Replacement Property in a regular deferred exchange, since it has already been identified and parked for you. 
A reverse exchange is a more expensive transaction than a regular 1031 exchange because it involves a lot more work, but it also provides several advantages. Having additional time to manage your exchange enhances your negotiating power for both your purchase and sale, which typically produces an economic benefit in your favor. Since you have the opportunity to purchase the right property at a price that fits your long-term needs, you reduce the risk of failing your exchange and becoming a taxpayer.

The Benefits of a Reverse 1031 Exchange

Learn about reverse 1031 exchanges and how they can maximize your investment strategies by enabling property rollovers before selling an existing asset.

The Benefits of a Reverse 1031 Exchange by Ralph Bunje Jr.

by Ralph Bunje Jr., a Diamond Certified Expert Contributor

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Video: Understanding 1031 Reverse Exchanges

A 1031 exchange can be a beneficial financial tool, but limited time constraints can make it a difficult feat to pull off. That's why it's worthwhile to consider doing a reverse exchange.

Today we're in San Francisco with Diamond Certified expert contributor Ralph Bungee Jr. of Independent Exchange Services to learn more. One of the things that a lot of people have been asking about is something that has changed in the 1031 exchange industry.

I want to keep in mind: the industry has been around since 1921, but doing exchanges up until 1980, you basically had to buy and sell on the same day. That was really a trick, and it's even a bigger trick in today's world.

So what happened after 1980 is that you had a 45-180 day period following the close of escrow and the one that you sold your relinquished property to buy your replacement property. But the biggest problem was identifying something in 45 days in writing that you would be purchasing within 180 days. What we found is that in the current market environment where there's a lot of buyers around, it's been very hard to nail down the right property.

So we do reverse exchanges, and they've been allowed by the IRS since 1980, and we've been doing them pretty regularly now, especially in today's market. Where we will actually buy and park the property you wish to purchase. We will work with you and with your lender to put together a deal where we buy the property and park it for you. You then lease it from us during the 180-day period, and during that 180-day period, you have the opportunity to sell your property and buy it from us. 

As long as you do that, you bought the right property, you got it at the right price, you've improved your negotiating position on the sale, you've improved your negotiating position on the buy, you've made an economically superior investment. One of the nice things about it is it means that you have purchased the right property and that you didn't buy the wrong property because you were running out of time to identify something. You bought the right property, which means when you go through the next five years, you're pleased that you did it, and you got it done in time.

It's a more expensive transaction, so I'll give you a heads up on it because there's a lot more work involved. But it's one of those transactions where we find that, in most cases, people actually make money on a reverse exchange because of the benefits that they get with the improved negotiating position on both their sale and buy.

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Ralph Bunje Jr.: A Successful Exchange

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